that information would not allow anyone to profit from it because stock prices already incorporate the information. 1. Weak form asserts that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices and trading volume. Empirical evidence supports the weak-form. A strong body of evidence supports weak-form efficiency in the major U.S. securities markets. For example, test results suggest that technical trading rules do not produce superior returns after adjusting for transaction costs and taxes. 2. Semi-strong form says that a firm’s stock price already reflects all publicly available information about a firm’s prospects. Examples of publicly available information are annual reports of companies and investment data. Empirical evidence mostly supports the semi-strong form. Evidence strongly supports the notion of semi-strong efficiency, but occasional studies (e.g., those identifying market anomalies including the small-firm effect and the January effect) and events (e.g., stock market crash of October 1987) are inconsistent with this form of market efficiency. Black suggests that most so-called “anomalies” result from data mining.
3. Strong form of EMH holds that current market prices reflect all information, whether publicly available or privately held, that is relevant to the firm. Empirical evidence does not support the strong form. Empirical evidence suggests that strong-form efficiency does not hold. If this form were correct, prices would fully reflect all information, although a corporate insider might exclusively hold such information. Therefore, insiders could not earn excess returns. Research evidence shows that corporate officers have access to pertinent information long enough before public release to enable them to profit from trading on this information. b. Briefly discuss the implications of the efficient market hypothesis for investment policy as it applies to: (i) technical analysis in the form of charting, and (ii) fundamental analysis. 24(b). Technical analysis in the form of charting involves the search for recurrent and predictable patterns in stock prices to enhance returns. The EMH implies that this type of technical analysis is without value. If past prices contain no useful information for predicting future prices, there is no point in following any technical trading rule for timing the purchases and sales of securities. According to weak-form efficiency, no investor can earn excess returns by developing trading rules based on historical price and return information. A simple policy of buying and holding will be at least as good as any technical procedure. Tests generally show that technical trading rules do not produce superior returns after making adjustments for transactions costs and taxes.
- Three '15
- Financial Markets, Active management, EMH, Efficient-market hypothesis